As the United States' neighbor and second-largest trading partner, no country has followed President Trump's rhetoric quite like Mexico. While sometimes it seems that even soothsayers cannot predict what the President will say or do next, below we summarize several themes that may impact the commercial real estate markets, Mexican REITs (FIBRAs) and cross-border commercial real estate investment from the United States to Mexico.
Although the US president has the power to rescind trade agreements, any attempt to rescind NAFTA would be met with resistance by policymakers on both sides of the border. The more likely scenario is a renegotiation of the 22-year-old trade agreement. This would play out on a more even playing ground than initially expected. US and Mexico economic ties have never been stronger. Mexico recently became the second-largest exporter to the United States, and NAFTA has created five million jobs in the United States. Recently, some manufacturers have accepted tax breaks to keep American jobs in the United States. While that strategy is effective in isolated cases, shifting the burden of a competitiveness gap to taxpayers is not a sustainable long-term strategy. If NAFTA is in fact renegotiated, the outcome will directly impact real estate assets both north and south of the border, particularly with respect to industrial properties.
Interest Rates and Inflation
Facing a depreciating peso, the Bank of Mexico has increased interest ratesaiming to maintain its target inflation rate of 3%. While conventional wisdom suggests interest rate increases negatively impact FIBRAs (due to the inverse relationship between cost of debt and the rate of return on equities), long-term inflation also leads to increased rents and capital gains. Public-market investors will ultimately connect the dots and real estate equities, including FIBRAs, should rise.
Retail and hospitality FIBRAs may also see asset appreciation due to the weaker peso....